Compliance Guide to Small Entities

Regulation D: Reserve Requirements of Depository Institutions

12 CFR 204

What compliance is required by the Federal Reserve Act and Regulation D?

Section 19 of the Federal Reserve Act (FRA)2 requires the Board to impose reserve requirements on certain deposits and other liabilities of depository institutions. Depository institutions must comply with these reserve requirements and the related reporting requirements.

Regulation D implements the reserve requirements of section 19 of the FRA.3 Regulation D defines the institutions and the deposits that are subject to reserve requirements and sets forth how reserve requirements are calculated. Regulation D also sets forth how institutions satisfy those requirements and identifies the obligations of institutions to file reports in connection with reserve requirements.

I. Institutions and Deposits Subject to Reserve Requirements

Is my institution subject to reserve requirements?

Depository institutions, U.S. branches and agencies of foreign banks, and Edge and Agreement corporations must satisfy Regulation D's reserve requirements.4 "Depository institution" includes banks, savings associations, savings banks, and credit unions. "Depository institution" includes those that are federally insured and those that are eligible to apply for federal deposit insurance.

What types of deposits or other liabilities are subject to reserve requirements?

Regulation D imposes reserve requirements on three types of deposits or other liabilities: transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. These terms are further defined in Regulation D.

Transaction accounts

What is a transaction account?

Transaction accounts are defined in section 19 of the FRA and in Regulation D as an account from which the depositor or account holder is permitted to "make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, or other similar device for the purpose of making payments or transfers to third persons or others...." Demand deposits, negotiable order of withdrawal (NOW) accounts, and share draft accounts are all included in the definition of "transaction account." "Time deposits" and "savings deposits," discussed further below, are excluded from the Regulation D definition of transaction account. See the definition of "transaction accounts" in section 204.2(e) of Regulation D.

Demand deposits are deposits that are payable on demand, or issued with an original maturity or required notice period of less than seven days, or a deposit representing funds for which the depository institution does not reserve the right to require at least seven days' written notice of an intended withdrawal. Demand deposits may be in the form of 1) checking accounts, 2) certified, cashier's, teller's, and officer's checks, and 3) traveler's checks and money orders that are primary obligations of the issuing institution. Other forms of accounts may also meet the definition of "demand deposit." See the definition of "demand deposit" in section 204.2(b) of Regulation D.

NOW accounts, or "negotiable order of withdrawal" accounts, have three mandatory characteristics. First, a NOW account must be one where the depository institution has reserved the right to require at least seven days' written notice prior to the withdrawal or transfer of any funds in the account. Second, a NOW account must be subject to check, draft, negotiable order of withdrawal, share draft, or other similar item for the purpose of making transfers to third parties. Third, NOW accounts may only contain funds belonging to individuals, nonprofit organizations, or public funds of governmental units.5

What reserve requirement ratio applies to transaction accounts?

Transaction accounts are subject to reserve requirement ratios of zero percent, three percent, and ten percent, depending on the amount of an institution's transaction accounts.

An institution's transaction accounts up to a specified amount--known as the exemption amount--are subject to a reserve requirement of zero percent. An institution's transaction accounts that exceed the exemption amount but are at or beneath another amount--known as the low reserve tranche--are subject to a reserve requirement of three percent. An institution's transaction accounts that exceed the low reserve tranche are subject to a reserve requirement of ten percent.

For purposes of Regulation D, an institution's "transaction accounts" are its net transaction accounts, that is, its total transaction accounts less deductions for cash items in the process of collection and demand balances due from other depository institutions.

Time deposits

What is a time deposit?

Time deposits are accounts that have a maturity of at least seven days from the date of deposit. A time deposit may be payable on a specified date not less than seven days after the date of deposit, or after the expiration of a specified period of time not less than seven days after the date of deposit. If funds are withdrawn from a time deposit within six days of the date of deposit, an early withdrawal penalty of at least seven days' simple interest on the amount withdrawn must be charged. An early withdrawal penalty must also be charged if part of the time deposit is withdrawn within six days of the most recent partial withdrawal. If the required early withdrawal penalties are not imposed, the account cannot be classified as a "time deposit." In that case, the account may become a savings deposit if it meets the requirements for a savings deposit; otherwise it becomes a transaction account. See the definition of "time deposit" in section 204.2(c) of Regulation D.

A "nonpersonal time deposit" is generally a time deposit representing funds in which any beneficial interest is held by a depositor which is not a natural person. See the definition of "nonpersonal time deposit" in section 204.2(f) of Regulation D.

What reserve requirement ratio applies to nonpersonal time deposits?

The reserve requirement ratio for nonpersonal time deposits is zero percent. The reserve requirement ratio for nonpersonal time deposits has been set to zero percent for well over twenty years.

Eurocurrency liabilities

What are Eurocurrency liabilities?

For depository institutions, Eurocurrency liabilities are net balances due by a depository institution to its non-U.S. offices. For U.S. branches and agencies of foreign banks, Eurocurrency liabilities are net balances due to its foreign bank after making certain deductions. Eurocurrency liabilities also include certain assets acquired from U.S. offices and held by non-U.S. offices and certain types of credit outstanding from non-U.S. offices to U.S. residents. See the definition of "Eurocurrency liabilities" in section 204.2(h) of Regulation D.

What reserve requirement ratio applies to Eurocurrency liabilities?

The reserve requirement ratio for Eurocurrency liabilities is zero percent. The reserve requirement ratio for Eurocurrency liabilities has been set to zero percent for well over twenty years.

Savings Deposits

What is a savings deposit?

Savings deposits are not subject to reserve requirements. Savings deposits generally have no specified maturity period. The two most significant features of the "savings deposit" definition are the reservation of the right to require advance notice of withdrawal, and the monthly limit on the number of "convenient" transfers or withdrawals that may be made from the account.

Reservation of right to require advance notice of withdrawal. In order to classify an account as a "savings deposit," the account agreement between the depository institution and the customer must specify that the depository institution reserves the right at any time to require seven days' advance written notice of an intended withdrawal. (As a practical matter, this right is rarely exercised.)

Monthly limit of six "convenient" transfers and withdrawals. In addition, for an account to be classified as a "savings deposit," the account agreement between the depository institution and the customer must provide that the depositor may make no more than six "convenient" transfers or withdrawals per month from the account. "Convenient" transfers and withdrawals, for purposes of this limit, include preauthorized, automatic (including, but not limited to, transfers from the savings deposit for overdraft protection or for direct bill payments), and telephonic transfers and withdrawals (including those initiated by facsimile, computer, email, or internet instruction), and transfers made by check, debit card, or other similar order made by the depositor and payable to third parties.

Transfers and withdrawals that are unlimited. Other, less convenient types of transfers and withdrawals from "savings deposit" accounts are not subject to the monthly numeric limit. An unlimited number of transfers and withdrawals may be made from a "savings deposit" when made in person at the bank, by mail, or by using an ATM. Also, a transfer or withdrawal request initiated by telephone does not count toward the transfer limit when the withdrawal is disbursed via check mailed to the depositor.

How does a depository institution comply with the monthly limit on convenient transfers from savings deposits?

Regulation D requires a depository institution to comply in one of two ways: either (1) prevent transactions in excess of the limit or (2) adopt procedures to monitor excess transfers on an ex post basis and contact a customer who exceeds the limits more than occasionally. If a customer continues to violate the transfer limits after notification, the depository institution must either close the savings account and place the funds in another type of account or take away the transfer and draft capacities of the savings account.

II. Calculation and Maintenance of Reserve Requirements

How are reserve requirements calculated?

Reserve requirements are calculated by applying the reserve requirement ratios specified in Regulation D to an institution's reservable liabilities (transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities). The reserve requirement ratios are established by the Board in Regulation D within ranges specified in section 19 of the FRA.

How are an institution's reservable liabilities determined?

Reservable liabilities are determined based on the deposits that an institution reports on the FR 2900 form (Report of Transaction Accounts, Other Deposits, and Vault Cash). The reserves "computation period" covers one (for quarterly reporters) or two (for weekly reporters) deposit reporting periods. For each computation period, there is a linked "reserve maintenance period" over which the institution must satisfy its reserve requirement.

Reserve computation periods are dependent on the frequency, either weekly or quarterly, with which an institution files the FR 2900 report. The linked reserve maintenance period consists of 14 consecutive days beginning on a Thursday and ending on the second Wednesday thereafter.

Reserve maintenance calendars, which illustrate the relationship between computation periods and maintenance periods for weekly and quarterly FR 2900 reporters, are available for reference on the Reserve Central website.

The reserve balance requirement, the amount of the institution's reserve requirement that must be met by holding balances at a Federal Reserve Bank, need only be met on average over the maintenance period. On any given day of the maintenance period, an institution's end-of-day account balance may exceed or fall short of the reserve balance requirement. An institution can offset a daily surplus or shortfall by maintaining lower or higher balances, respectively, on subsequent days in the maintenance period.

An institution can calculate its reserve balance requirement manually using the worksheets at the end of Chapter 3 "Calculation of Reserve Balance Requirements" of the Reserve Maintenance Manual (PDF).

How are the exemption amount and the low reserve tranche determined?

The exemption amount and the low reserve tranche are determined by the Board and codified in Regulation D. Each year, the Federal Reserve Board adjusts the levels of the exemption amount and the low reserve tranche based on statutory formulas. The current levels for the exemption amount and low reserve tranche can be found in section 204.4 of Regulation D.

How can my institution satisfy its reserve requirements?

Form of Satisfying Reserve Requirements. Reserve requirements can be satisfied in the form of 1) vault cash, or 2) a balance maintained in the institution's account at the Federal Reserve Bank in the Federal Reserve District in which the institution is located, or with a pass-through correspondent. The portion of the reserve requirement that is not satisfied by vault cash is called the reserve balance requirement. An institution that is required to maintain balances to satisfy its reserve balance requirement may do so directly with its Reserve Bank or in the Reserve Bank account of its pass-through correspondent.

Maintenance On Average Within Penalty-Free Band. An institution must satisfy its reserve balance requirement during a reserve maintenance period by maintaining average balances at a Federal Reserve Bank at an amount within a penalty-free band. A penalty-free band is a range above and below the reserve balance requirement within which an institution needs to maintain its average balance over the maintenance period in order to satisfy its reserve balance requirement. The top of the penalty-free band is equal to the reserve balance requirement plus a dollar amount that is the greater of 10 percent of the institution's reserve balance requirement or $50,000. The bottom of the penalty-free band is equal to the reserve balance requirement minus a dollar amount that is the greater of 10 percent of the institution's reserve balance requirement or $50,000, with a lower bound of zero. See the definition of "top of the penalty-free band" and "bottom of the penalty-free band" in sections 204.2(gg) & (hh) of Regulation D.

If an institution maintains an average end-of-day balance over the reserve maintenance period that is less than the bottom of its penalty-free band, then the institution is deficient and may be subject to a reserve deficiency charge. The deficiency amount is calculated as the difference between the bottom of an institution's penalty-free band and the institution's average balance maintained over a maintenance period. The charge rate for reserve deficiencies is one percentage point above the rate in effect for borrowing primary credit6 from the institution's Federal Reserve Bank on the first day of the calendar month in which the deficiency occurred. Charges are assessed on the basis of daily average deficiencies during each maintenance period.

For an example that illustrates the mechanics of failing to satisfy reserve balance requirements, please reference Chapter 5 "Mechanics of Reserve Maintenance" of the Reserve Maintenance Manual (PDF).

III. Reporting Requirements for Deposits

What are my institution's reporting requirements?

Every institution is placed into one of four categories for deposit reporting purposes. In general, the larger the institution, the more detailed and frequent its reporting.

The first two reporting categories, characterized as "detailed reporting," apply to institutions that have reservable liabilities above the exemption amount. Institutions subject to detailed reporting file the Report of Transaction Accounts, Other Deposits, and Vault Cash (FR 2900). These institutions file the report either weekly or quarterly, generally depending on the level of the institution's deposits.

The last two reporting categories, characterized as "reduced reporting," apply to institutions that have reservable liabilities below the exemption amount. Institutions subject to reduced reporting either file the Annual Report of Deposits and Reservable Liabilities (FR 2910a) or no report at all, depending on their total deposit levels. Report forms and instructions can be found on the Board's website: www.federalreserve.gov/apps/reportforms/default.aspx

The Board determines the placement of institutions in appropriate reporting categories, and the Reserve Banks inform each institution of its particular reporting requirement. These determinations are made each July and become effective in September. For a detailed description of each reporting category and for more information on the annual determination of the placement of institutions in appropriate reporting categories, please reference Chapter 2 "Reporting Requirements" of the Reserve Maintenance Manual (PDF).

All institutions, whether maintaining reserves directly with a Reserve Bank or in a pass-through arrangement, must submit their deposit reports to the Reserve Bank for the District in which they are located.7

Institutions may file their deposit reports either electronically or in hard-copy form.

If you have additional questions about Regulation D, please consult your local Reserve Bank contact.

1. This is a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended (5 U.S.C. § 601 note). The guide summarizes and explains the rule, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements. Return to text

4. Regulation D applies to U.S. branches and agencies of foreign banks with a parent or affiliates with banking assets in excess of $1 billion. Regulation D further applies to Edge and Agreement corporations in the same manner and to the same extent as depository institutions. Return to text

7. A foreign bank's branches and agencies located in the same state but in different Districts must submit separate FR 2900 reports (aggregated by District) to their respective Reserve Banks. Return to text